Bank of England and DEFRA back UK nature risk study

The Green Finance Institute will seek to quantify UK financial and economic risks from exposure to nature degradation. 

The Bank of England and DEFRA have commissioned the Green Finance Institute (GFI) to conduct a study to assess the nature-related dependencies of the UK’s financial sector, and to quantify nature-related financial risk to the UK economy.

According to Wednesday’s announcement, this will mark the first time that the materiality of nature-related financial risks and the potential financial impact of biodiversity loss and ecosystem degradation has been analysed with respect to UK business and financial institutions.  

The GFI’s work is also being supported by the UN Environment Programme World Conservation Monitoring Centre and the universities of Oxford and Reading. The study is due to be published this year.

Last year, the Bank of England’s Financial Policy Committee (FPC) urged the institution to build its understanding of how nature risks might arise and their potential materiality for UK financial firms and the financial system.

Sarah Breeden, executive director of financial stability strategy and risk at the bank, and a member of the FPC, said: “The financial system’s exposure to declines in nature – whether deterioration of air, water or soil quality, deforestation or the depletion of fish stocks – is clear. But establishing nature-related financial risks is complex and unprecedented.

“This work – to quantify the cost of nature-related financial risks to the UK – seeks to fill that gap.” 

The study will build on early moves by Banque de France and the Dutch central bank (DNB), which have both produced reports on the nature-related risks and dependencies of their financial systems. 

In January, Responsible Investor reported that the French central bank was looking to go beyond its 2021 report and analyse the impact of nature on specific sectors with a more dynamic perspective.  

Also seeking to build upon its initial report, the DNB launched a project last year with the Netherlands Environmental Assessment Agency to develop different scenarios to provide insight into the quantitative impact that biodiversity loss can have on the Dutch financial sector.

In its 2022 annual report, the DNB described the task as “not so easy” in comparison with work looking at climate risks, due to the lack of an equivalent single metric to CO2 emissions in the biodiversity space.

The bank expects to complete the project by the end of 2023. 

Across the board, central banks have been ramping up their efforts to understand nature related risks. Last year, the NGFS launched a Nature Taskforce, with a mandate to mainstream the consideration of nature-related risks across the initiative’s various workstreams.

A first version of a conceptual framework, which will provide NGFS members with a common understanding and a common language that will help them understand and address nature-related risks, is expected this summer.  

This will be followed towards the end of the year by other contributions including technical work on the development of nature-related scenarios.  

Jean Boissinot, head of the NGFS secretariat, also told RI, that the aim is that by no later than next year, all the working groups of the NGFS will be able to leverage on a common understanding and common references to integrate nature related developments into their own work on supervision, financial stability monitoring, monetary policy, portfolio management, etc.